Brand Management 1
Lecture 11
LINE EXTENSION
Introduction
The discussion in this lecture moves on to the negative sides of extension. Having known those
we shall be in a better position to realistically manage extensions and that precisely is going to
be an important part of this lecture.
Negative side of line extension
1. Retailer power
When all managers like to extend with similar objectives, the obvious results are
bottlenecks at the retail level. This clutter leads to selective attitude on part of retailers
who obviously are more receptive toward more powerful brands. Those that get
discriminated try to react by getting into promotions, thereby making retailers and
consumers happy at the same time. What ensues is obviously the price wars and erosion
of brand loyalty. Not good for the brand!
2. Lack of scale economies
As against a mono product, handling and managing a variety of products is cumbersome
from production, logistics, inventory, and costing points of view. Smaller runs deprive the
company of scale economies. They are more expensive. According to one study,
compared with an index of 100 as the cost of production for a mono product, the
Corresponding
cost
index
for
differentiated products is shown on the
diagram1.
Economies of scale take on added
importance if the brand sells in high
volumes across a huge geographic area
positioned on consumer friendly pricing.
Cost Index – Mono vs. Differentiated
Products
3. Non-controlled extension weakens
range Extensions without strong
rationale
can
become
counterproductive, because creating meaningful
positioning for a variety of products
within the same line becomes
challenging. All positions have to be
created with subtle yet distinct
differences.
Without
meaningful
differences, products tend to eat into
each other’s volume and cause
cannibalization!
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Reaction to negative side of extensions
There has been lately a tendency on part of the companies to de-segment or counter-segment
their markets. Proctor and Gamble reduced their line by about 15 to 25 percent in 1992 only
because those entries were not turning in requisite volumes and profitability1. It also leads to
consumer frustration and that’s what we learnt in terms of consumer revolt. The factor of scale
economies takes a turn for better under the circumstances of de-segmentation. Lesser number of
offerings leads to higher volumes, which result in lower costs of producing.
Immediate actions for better managing line extensions
1. Improve cost accounting systems
Management experts lay a lot of emphasis on improving cost accounting systems.
Experience shows that many companies are system-deficient in this regard. You must have
accurate figures to charge every range item that you produce. The objective is to determine
which items are more profitable than others.
2. Allocate resources more to high-margin items
As brand managers and good businesspeople, you must allocate marketing resources to
different items in line with their contribution to the overall profitability. The extensions that
give higher margins must get priority over those that attract occasional buyers.
3. Salespeople must define the role of each extension
Each extension has to be seen in the context of its sales value. The salespersons responsible
for each must produce figurative evidence of what they sell is worth its existence.
Salespeople must understand the costing angle and then produce results out of the
extensions that account for most of the profitable business.
They must be able to relate profitability with high volume items. Their education as part of
AUDIENCE is of significance, for mostly salespeople go after volumes no matter how high
is the cost. They must understand the actual positioning of the product along with the
strategic goals of financial growth. Volumes just for the sake of a high market share with
low profitability may not be the company’s priority at all times.
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Small volumes adding up to a certain total volume cost a lot more than the same total
arrived at by less number of products. Economies!
4. Encourage product withdrawal
Implement this philosophy and withdraw low volume items in a phased way so that your
existing customers do not turn away to competition; they should rather switch over to
another attractive offering within your range.
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